>Date: Wed, 22 Oct 1997 12:59:03 -0700 (PDT)
>From: Charles <[EMAIL PROTECTED]>
>To: "S. Lerner" <[EMAIL PROTECTED]>
>Subject: Chossudovsky paper
>MIME-Version: 1.0
>
>
>Did this interesting document reach me through FW?
>
>If not, you might want to post it there.
>
>
> - Charles -
>
>>From [EMAIL PROTECTED] Wed Oct 22 12:57:32 1997
>Date: Tue, 21 Oct 1997 13:16:51 -0400
>From: Michel Chossudovsky <[EMAIL PROTECTED]>
>
> THE GLOBAL FINANCIAL CRISIS
>
> by
>
> Michel Chossudovsky
>
>The writer is Professor of Economics at the University of Ottawa and has
>written widely in issues of international finance and macro-economic
>reform. He is the author of "The Globalization of Poverty, Impacts of IMF
>and World Bank Reforms", Third World Network, Penang and Zed Books, London,
>1997.
>
>Copyright by Michel Chossudovsky, Ottawa 1997. All rights reserved. (This
>text can be posted, for publication in printed form, contact the author).
>
>The author can be contacted at [EMAIL PROTECTED], fax: 1-613-7892050.
>
>
>Black Monday October 19, 1987 will be remembered as the largest one day
>drop in the history of the New York Stock Exchange overshooting the
>collapse of October 28, 1929, which prompted the Wall Street crash and the
>beginning of the Great Depression. In the 1987 meltdown, 22.6 percent of
>the value of US stocks was wiped out largely during the first hour of
>trading on Monday morning... The plunge on Wall Street sent a "cold shiver"
>through the entire financial system leading to the tumble of the European
>and Asian stock markets...
>
>Almost ten years later on Friday August 15, 1997, Wall Street experienced
>its largest one day decline since 1987. The Dow Jones plummeted by 247
>points. The symptoms were similar to those of Black Monday: "institutional
>speculators" sold large amounts of stock with the goal of repurchasing them
>later but with the immediate impact of provoking a plunge in prices.
>Futures' and options' trading played a key role in precipitating the
>collapse of market values.
>
>The tumble on August 15, 1997 immediately spilled over onto the World's
>stock markets triggering substantial losses on the Frankfurt, Paris, Hong
>Kong and Tokyo exchanges. Various "speculative instruments" in the equity
>and foreign exchange markets were used with a view to manipulating price
>movements.
>
>In the weeks that followed, stocks continued to trade nervously. Wide
>speculative movements were recorded on Wall Street; billions of dollars
>were transacted through the NYSE's Superdot electronic order-routing system
>with the Dow swinging spuriously up and down in a matter of minutes. The
>Asian equity and currency markets declined steeply under the brunt of
>speculative trading. In a three week period the (Hong Kong) Hang Seng Index
>had declined by 15 percent. The Japanese bond market had plunged to an all
>time low.
>In turn, billions of dollars of central bank reserves had been appropriated
>by institutional speculators. (The Thai Central Bank lost more than ten
>billion dollars of its official reserves in the period extending from June
>through September 1997).
>
>Business forecasters and academic economists alike have casually
>disregarded the dangers alluding to "strong economic fundamentals"; G7
>leaders are afraid to say anything or act in a way which might give the
>"wrong signals"... Wall Street analysts continue to bungle on issues of
>"market correction" with little understanding of the broader economic
>picture.
>
>In turn, public opinion is bombarded in the media with glowing images of
>global growth and prosperity. The economy is said to be booming under the
>impetus of the free market reforms. Without debate or discussion, so-called
>"sound macro-economic policies" (meaning the gamut of budgetary austerity,
>deregulation, downsizing and privatisation) are heralded as the key to
>economic success.
>
>The realities are concealed, economic statistics are manipulated, economic
>concepts are turned upside down. Unemployment in the US is said to be
>falling yet the number of people on low wage part-time jobs has spiralled.
>The stock market frenzy has taken place against a background of global
>economic decline and social dislocation.
>
>Table 1: Single-Day Declines on Wall Street
>
>(Dow Jones Industrial Average, percentage change)
>
>
> October 28, 1929 -12.8%
> October 29, 1929 -11.7%
> November 6, 1929 -9.9%
> August 12, 1932 -8.4%
> October 26, 1987 -8.0%
> July 21, 1933 -7.84%
> October 18, 1937 -7.75%
> October 5, 1932 -7.15%
> September 24, 1931 -7.07%
>
>
> October 19, 1987 -22.6%
>
>
>A New Financial Environment
>
>A new global financial environment has unfolded in several stages since the
>collapse of the Bretton Woods system of fixed exchange rates in 1971. The
>debt crisis of the early 1980s (broadly coinciding with the Reagan-Thatcher
>era) unleashed a wave of corporate mergers, buy-outs and bankruptcies.
>These changes have in turn paved the way for the consolidation of a new
>generation of financiers clustered around the merchant banks, the
>institutional investors, stock brokerage firms, large insurance companies,
>etc. In the process, commercial banking functions have coalesced with those
>of the investment banks, stock brokers and currency dealers.
>
>The 1987 crash served to exacerbate these changes by "clearing the decks"
>so that only the "fittest" survive. A massive concentration of financial
>power has taken place in the last ten years: from these transformations,
>the "institutional speculator" has emerged as a powerful actor
>overshadowing and often undermining bona fide business interests. Using a
>variety of instruments, these institutional actors appropriate wealth from
>the real economy. They
>often dictate the fate of companies listed on the NYSE. Totally removed
>from entrepreneurial functions in the real economy, they have the power of
>precipitating large industrial corporations in bankruptcy.
>
>Their activities include speculative transactions in commodity futures,
>stock options and the manipulation of currency markets including the
>plunder of central banks' foreign exchange reserves (eg. Thailand,
>Indonesia, Malaysia and the Philippines in July-September 1997). They are
>also routinely involved in "hot money deposits" in the emerging markets of
>Latin America and Southeast Asia, not to mention money laundering in the
>many offshore banking havens. The daily turnover of foreign exchange
>transactions is more than one trillion dollars a day of which only 15
>percent corresponds to actual commodity trade and capital flows.
>
>Within this global financial web, money transits at high speed from one
>banking haven to the next, in the intangible form of electronic transfers.
>"Legal" and "illegal" business activities have become increasingly
>intertwined. Favoured by financial deregulation, the criminal mafias have
>also expanded their role in the spheres of merchant banking.
>
>The Concentration of Wealth
>
>This restructuring of global financial markets and institutions has enabled
>the accumulation of vast amounts of private wealth, a large portion of
>which has been amassed as a result of strictly speculative transactions. No
>need to produce commodities: enrichment is increasingly taking place
>outside the real economy divorced from bona fide productive and commercial
>activities. In turn, part of the money accumulated from speculative
>transactions is funnelled towards the offshore banking havens. This
>critical drain of billions of dollars in capital flight dramatically
>reduces state tax revenues, paralyzes social programmes, drives up budget
>deficits, and spurs the accumulation of large public debts.
>
>In contrast, the earnings of the direct producers of goods and services are
>compressed; the standard of living of large sectors of the World population
>including the middle classes has tumbled. Wage inequality has risen in the
>OECD countries. In both the developing and developed countries, poverty has
>become rampant; according to the ILO, Worldwide unemployment affects more
>than 800 million people. The accumulation of financial wealth feeds on
>poverty and low wages.
>
>The post-1987 period is marked by economic stagnation. In the OECD
>countries, GDP growth has fallen from 3.1 percent per annum in the 1980s to
>a meagre 1.7 percent in the 1990s. In the developing World, economic
>decline exceeds that experienced in the USA during the Great Slump of the
>1930s: many countries in Sub-Saharan Africa and Latin America have
>experienced negative economic growth rates. The figures on GDP, however do
>not reflect the seriousness of the slide in production living standards
>around the World.
>
>Replicating the Policy Failures of the late 1920s
>
>Wall Street was swerving dangerously in volatile trading in the months
>which preceded the crash of October 29, 1929. Laissez faire under the
>Coolidge and Hoover administrations was the order of the day: in early 1929
>the Federal Reserve Board declared that it "neither assumes the right nor
>has it any disposition to set itself up as an arbiter of security
>speculation or values."
>
>The economics establishment largely upheld this verdict. The possibility of
>a financial meltdown had never been seriously contemplated. Professor
>Irving Fisher of Yale University stated authoritatively in 1928 that
>"nothing resembling a crash can occur". In 1929, a few months before the
>crash, he affirmed that "there may a recession in the price of stocks but
>nothing in the nature of a catastrophe".(quoted in Michel Beaud, A History
>of Capitalism, Monthly Review Press, New York, 1983, p. 158).
>
>The illusion of economic prosperity persisted: optimistic business
>predictions prevailed even after the collapse of the New York Stock
>Exchange. In 1930, Irving Fisher stated confidently that "for the immediate
>future, at least, the perspective is brilliant". According to the
>prestigious Harvard Economic Society: "manufacturing activity [in 1930]...
>was definitely on the road to recovery" (quoted in John Kenneth Galbraith,
>The Great Crash, 1929, Penguin, London).
>
>Mainstream Economics Upholds Financial Deregulation
>
>The same complacency prevails today as during the frenzy of the late 1920s:
>"The [1987] crash had left many people wondering what happened, why it
>happened and what can be done to prevent it from happening again". The
>broad economic causes of the crisis are not addressed. Echoing almost
>verbatim the economic slogans of Irving Fisher, today's economic orthodoxy
>not only refutes the existence of an economic recession, it also denies
>outright the possibility of a financial meltdown: "Happy days are here
>again ...a wonderful opportunity for sustained and increasingly global
>economic growth is waiting to be seized..." (Let Good Times Roll, Financial
>Times, editorial commenting the OECD economic forecasts, January 1st,
>1995). According to Nobel Laureate Robert Lucas of Chicago University, the
>decisions of economic agents are based on so-called "rational
>expectations", ruling out the possibility of systematic errors which might
>lead the stock market in the wrong direction...
>
>In the aftermath of the 1987 stock market crisis, the regulatory policy
>issues were never resolved. According to the various commissions set up by
>the US Congress, the White House and the New York and Chicago exchanges,
>the 1987 crash had been triggered by specific events leading to "reactive
>responses" by major financial players including institutional traders and
>dealers in mutual funds. No other reason was given. "Sound macro-economic
>policies" combined with financial deregulation were the irrevocable
>answers. The term "speculation" does not appear in Wall Street's financial
>glossary.
>
>A presidential task-force had been formed under the chairmanship of
>Nicholas Brady (later to become Treasury Secretary in the Bush
>Administration). The institutional speculators overshadowing bona fide
>corporate interests, represented a powerful lobby capable of influencing
>the scope and direction of regulatory policy. The task-force took on a
>detached attitude pointing to the "adequacy" of existing regulations.
>
>In the aftermath of the 1987 crisis, the policy errors of the 1920s were
>repeated. Government should not intervene; the New York and Chicago
>exchanges were invited to fine-tune their own regulatory procedures which
>largely consisted in "freezing" computerised programme trading once the Dow
>Jones falls by more than 50 points.("Five Years On, the Crash Still Echoes,
>The Financial Times, October 19, 1992). These so-called "circuit-breakers"
>have proven to be totally ineffective in averting a meltdown.
>
>Recent experience amply demonstrates that the Dow Jones can swing back and
>forth by more than fifty points in a matter of minutes facilitated by the
>NYSE's Superdot electronic order-routing system. Superdot can now handle
>(without queuing) more than 300,000 orders per day (an average of 375
>orders per second) representing a daily capacity of more than two billion
>shares. While its speed and volume have increased tenfold since 1987, the
>risks of financial instability are significantly greater. Federal Reserve
>Board Chairman Alan Greenspan admits that: "[while technological advances
>have enhanced the potential for reducing transaction costs (...), in some
>respects they have increased the potential for more rapid and widespread
>disruption" (BIS Review, No. 46, 1997)
>
>Moreover, in contrast to the 1920s, major exchanges around the World are
>interconnected through instant computer link-up: volatile trading on Wall
>Street, "spills over" into the European and Asian stock markets thereby
>rapidly permeating the entire financial system, including foreign exchange
>and commodity markets, not to mention the markets for public debt... The
>demise of national currencies under periodic attack by institutional
>speculators will inevitably backlash on the trillion dollars Euro and Brady
>bond markets.
>
>The Fate of National Economies
>
>Under the brunt of an impending balance of payments crisis, several of the
>largest debtor countries in Latin America, Southeast Asia and Eastern
>Europe are facing the same predicament as Mexico. Following the Mexican
>1994-95 crash, the IMF Managing Director Mr. Michel Camdessus intimated
>that ten other indebted countries could meet the same fate as Mexico
>requiring the application of potent doses of economic medicine: "we will
>therefore introduce still stronger surveillance to be sure that the
>convalescence goes well...". (quoted in David Duchan and Peter Norman,
>"IMF Urges Close Watch on Weaker Economies", Financial Times, London, 8
>February 1995, p. 1). However, by crippling national economies and
>requiring governments to deregulate, the IMF's "economic therapy" prevents
>the possibility of a "soft landing". "IMF surveillance" of debtor
>countries' macro-economic policy tends to further heighten the risks of
>financial meltdown.
>
>The present economic crisis is far more complex than that of the interwar
>period. Because national economies are interlocked in a system of global
>trade and investment, its impact is potentially far more devastating. The
>technological revolution (combined with delocation and corporate
>restructuring) has dramatically lowered the costs of production while at
>same time impoverishing millions of people.
>
>Macro-economic policies are internationalised: the same austerity measures
>are applied all over the World. In turn, large corporations have the power
>to move entire branches of industry from one country to another. Factories
>are closed down in the developed countries and production is transferred to
>the Third World where workers are often paid less than a dollar a day.
>
>The social consequences and geo-political implications of the economic
>crisis are far-reaching particularly in the uncertain aftermath of the Cold
>War. In the developing World and in the former Soviet block, entire
>countries have been destabilised as a consequence of the collapse of
>national currencies often resulting in the outbreak of social strife,
>ethnic conflicts and civil war... In the former Soviet Union as a whole,
>industrial output has plummeted by 48.8 percent and GDP by 44.0 percent
>over the 1989-1995 period. (Official data compiled by the United Nations
>Economic Commission for Europe). In some cases, wages have fallen to less
>than ten dollars a month; in Bulgaria, old age pensioners receive two
>dollars a month.
>
>Budget austerity, plant closures, deregulation and trade liberalisation
>have contributed to precipitating entire national economies into poverty
>and stagnation. In turn, the evolution of financial markets has reached a
>dangerous cross-roads. The massive trade in derivatives undermines the
>conduct of monetary policy in both the developing and developed countries.
>
>Dangerous Cross-Roads
>
>The speculative surge of stock values is totally at variance with the
>movement of the real economy. Stock markets "cannot lead their own life"
>indefinitely. Business confidence cannot be "sustained by recession". The
>price to earnings ratio (P/E) on the S&P 500 has risen dangerously to 25.8,
>well above the P/E level of 22.4 prevailing in the months prior to the
>October 1987 crash.
>
>In many regards, the stock market frenzy is analogous to the Albanian
>"ponzi" pyramid schemes. People who have invested their private savings
>will "get rich" while the market rises and as long as they leave their
>money in the stock market. As soon as financial markets crumble, life-long
>savings in stocks, mutual funds, pension and insurance funds are wiped out.
>More than forty percent of the American adult population has investments in
>the stock market. A financial meltdown would lead to massive loan default
>sending a cold shiver through the entire banking system; it would also
>result in bank failures as well as a tumble of pension and retirement
>savings funds.
>
>Financial Disarmament
>
>Market forces left to their own devices lead to financial upheaval. Close
>scrutiny of the role of major speculative instruments (including option
>trading, short sales, non-trading derivatives, hedge funds, non deliverable
>currency transactions, programme trading, index futures, etc.) should be
>undertaken.
>
>A report published by the Bundesbank had already warned in 1993 that trade
>in derivatives could potentially "trigger chain reactions and endanger the
>financial system as a whole". (Martin Khor, " Baring and the Search for a
>Rogue Culprit, Third World Economics, No. 108, 1-15 March 1995, p. 10).
>Regulation cannot be limited to the disclosure and reporting of trade in
>derivatives as recommended by the Bank for International Settlements (BIS);
>concrete measures applied globally and agreed by governments of both
>developed and developing countries are required to prohibit the use of
>specific speculative instruments.
>
>The risks associated with the electronic order routing systems should also
>be the subject of careful examination. Alan Greenspan, Chairman of the
>Federal Reserve Board admits that "the efficiency of global financial
>markets, has the capability of transmitting mistakes at a far faster pace
>throughout the financial system in ways which were unknown a generation
>ago..."(BIS Review, No. 46, 1997).
>
>It is essential that the World community acknowledge an increasingly
>dangerous situation and adopt without delay a coherent structure of
>financial regulation (and inter-governmental cooperation).
>
>This is a broad and complex political issue requiring substantial changes
>in the balance of political power within national societies. Those in the
>seat of political authority often have a vested interest in upholding
>dominant financial interests. At the June 1997 Denver Summit, G7 leaders in
>a muddled and confusing statement called for "stronger risk management",
>"improved transparency" and "strong prudential standards". The
>destabilising role of speculative activity on major bourses was never
>mentioned. In contrast, the G7 statements by political leaders profusely
>heralding the benefits of the free market have generated an atmosphere of
>deceit and economic falsehood. "Business confidence" has been artificially
>boosted by G7 rhetoric largely to the advantage of the institutional
>speculator.
>
>A form of "financial disarmament" is required directed towards curbing the
>tide of speculative activity. (The term "financial disarmament" was coined
>by the Ecumenical Coalition for Social Justice; see "The Power of Global
>Finance", Third World Resurgence, No. 56, March 1995, p.21.). In turn,
>"financial disarmament" would require dismantling the entire structure of
>offshore banking including the movement of dirty and black money.
>
>The global economic system is affected not only by the forces of recession
>and financial restructuring but also by complex social, political and
>strategic factors. The evolution of international institutions (including
>the World Trade Organization and the Bretton Woods twins) is also crucial
>inasmuch as these international bodies play an important role in overseeing
>and regulating macro-economic and trade policies invariably to the
>detriment of national societies.
>
>The World community should recognize the failure of the dominant neoliberal
>system inherited from the Reagan-Thatcher era. Slashing budgets combined
>with lay-offs, corporate downsizing and deregulation cannot constitute "the
>key to economic success". These measures demobilise human resources and
>physical capital; they trigger bankruptcies and create mass unemployment.
>Ultimately, they stifle the growth of consumer spending: "recession can not
>be a solution to recession".
>
>Regulating the stock market per se is a necessary but not a sufficient
>condition. Financial markets will not survive under conditions of global
>economic depression. An expanding real economy will not occur unless there
>is a major revamping of economic institutions and a rethinking of
>macro-economic reform...
>
>There are, however, no "technical solutions" to this crisis. Meaningful
>reforms are not likely to be implemented without en enduring social
>struggle. What is at stake is the massive concentration of financial wealth
>and the command over real resources by a social minority. The latter also
>controls the "creation of money" within the international banking system.
>
>The first crucial stage of this Worldwide struggle is to break the
>legitimacy of the neoliberal agenda as well as disarm the so-called
>"Washington consensus". The latter is endorsed by national governments
>around the World. In other words, "financial disarmament" is not tantamount
>to State "regulation" narrowly defined, it requires democratic forms of
>"social control" of financial markets as well as radical changes in the
>structures of political power.
>
>Social action cannot limit itself to the mere indictment of national
>governments and of the Washington based bureaucracy. Banks, transnational
>corporations, currency speculators, etc. must be pinpointed. This struggle
>must be broad-based and democratic encompassing all sectors of society at
>all levels, in all countries. Social movements and people's organisations
>acting in solidarity at national and international levels, must target not
>only their respective governments but also the various financial actors
>which feed upon this destructive economic model.
>
>
>
>
>
> Michel Chossudovsky
>
> Department of Economics,
> University of Ottawa,
> Ottawa, K1N6N5
>
> Fax: 1-613-7892050
> E-Mail: [EMAIL PROTECTED]
>
> Alternative fax: 1-613-5625999
